Economics, public policy, monetary policy, financial regulation, with a New Zealand perspective

Disagreeing with Amy Adams

Late last week, National Party finance spokesperson Amy Adams gave an interview to Bloomberg on the rather limp and half-hearted reforms underway to the monetary policy bits of the Reserve Bank Act. The planned amendments are currently being considered by Parliament’s Finance and Expenditure Committee.

Adams isn’t too keen on the proposed amendments to the statutory goal of monetary policy. I agree that the wording in the bill is poor, and suggests that there is room for semi-permanent tradeoffs that simply don’t exist. But I don’t agree with the National Party’s specific concern

Adams said National has concerns about the dual mandate because the minister will have the power to dictate which goal the RBNZ prioritizes, which could result in monetary policy being looser than it should be.

Not to put too fine a point on it, but (a) elected politicians should determine the goals of the central bank, and (b) throughout most of the previous government’s term (including the whole time Amy Adams was a Cabinet minister) there is a reasonable case to be made that monetary policy was tighter than it should have been. After all, inflation consistently undershot the target – the 2 per cent focal point – her colleague Bill English had explicitly added to the Policy Targets Agreement. Current inflation outcomes – core inflation still below 2 per cent – are largely the outcome of choices made under the rules (the PTA) set by the previous National government.

More generally, it might be nice if the National Party could point to any advanced economy at present which is having problems with consistently too high inflation. Australia perhaps, where the RBA has a statutory goal with some similarities to what the government is proposing? But no, core inflation in Australia has also been undershooting their target for some years now.

But my bigger disagreement with Amy Adams is over what appears to be her bigger concern. She doesn’t seem to like the proposed Monetary Policy Committee at all. She says she isn’t opposed in principle to a committee but doesn’t like the specifics

New Zealand’s opposition party has voiced “serious concerns” about government reforms of the central bank, saying they could undermine its independence and turn it into a political tool.

“I would hate to see the Reserve Bank becoming a little bit like the U.S. Supreme Court, where it’s all about stacking it with your people,” National Party finance spokeswoman Amy Adams said in an interview Thursday in Wellington. “It’s too important for that.”

I don’t like the specifics either, but that is because they leave far too much power in the hands of the Governor (directly or indirectly) and give the Minister of Finance astonishingly little role in key appointments.

You will recall that:

while the Minister appoints the Governor, he can only appoint someone recommended by the Bank’s Board,

in future the Minister will be able to appoint the Deputy Governor, but again only someone recommended by the Bank’s Board,

the remaining members of the Monetary Policy Committee are also appointed by the Minister, but he can only appoint people recommended by the Bank’s Board, and

the Bank’s Board members are appointed to five year terms, so for most of a new government’s first term, typically a majority of the Board will have been appointed by the previous government (and thus, in the current situation, under a different mandate and legislation).

And, of course, the Reserve Bank Governor himself sits on the Reserve Bank Board.

The Minister can, of course, propose to the Board names of people he would like to see appointed – perhaps he is already doing that, given that the selection process is well underway, even though the Act is not close to being passed (and if so, it feeds a non-transparency about the system that isn’t ideal – but he has no ability to appoint his own person to any of the direct decisionmaking roles (only – gradually – Board members themselves). And this is although the Minister will – rightly, this being a democracy – be held to account if Reserve Bank monetary policy choices/analysis turn out to have been poor. And that most of the Board members have backgrounds that make them ill-suited to determining who our key monetary policy decisionmakers should be, suggesting that they will mostly defer to the fulltimer – the Governor, who has long had too much barely trammelled power.

In a democracy, key appointments should be made directly by those whom we have elected. They can take advice, can consult etc, but the choice – and the responsibility – should lie with those whom we can toss out. Under the Reserve Bank bill, that still won’t be the case.

Amy Adams worries – in a totally overblown way – about comparisons with the US Supreme Court. On the one hand, perhaps she could turn her attentions to our own higher courts – where the incumbent Attorney-General (a fully political Cabinet member) gets to appoint whoever he or she wants. And on the other, perhaps she could show signs of actually understanding quite what (little) the Monetary Policy Committee – as being established in the bill – will be able to influence. The US Supreme Court isn’t controversial because the President nominates and the Senate confirms, but because far too much power has been given to the Supreme Court, covering almost every sphere of American life, and the members once appointed serve for life. The comparison with the government’s proposed MPC is so overblown as to be laughable.

And it isn’t as if the National Party spokesperson can point to other countries where monetary policy committees have ended up created the sorts of problems she worries about here. Especially not tame ones – majority internals, inability for members to speak openly, short terms etc. Take Australia, for example, where all the members of the Reserve Bank of Australia’s Board – the monetary policy decisionmaking body – are appointed (unconstrained) by the Federal Treasurer. Or the UK where most of the MPC members are appointed directly (unconstrained) by the Chancellor. Or the US, where members of the Board of Governors (who serve on the FOMC) are appointed by the President, subject to the advice and consent of the Senate – just like the Supreme Court, and yet not having taken the path Amy Adams worries about here (indeed, Trump quite recently nominated a technocrat who is a registered Democrat). Perhaps Amy Adams has other problematic monetary policy committees in mind? If so, perhaps she could let us in on her data?

The other area where Adams expresses concern is regarding the provision in the new bill for a nominee of the Secretary to the Treasury to serve as a non-voting participant in the MPC.

Treasury Secretary Gabriel Makhlouf will take the observer role and start attending RBNZ policy meetings from the end of this month.

“Treasury have wanted more control over the Reserve Bank since Adam played fullback for the apostles,” Adams said. “It also suits the government’s agenda. It’s in the government’s interest to be able to much more strongly dictate to the Reserve Bank what they should say about government policy and its effect on the economy.”

She said Treasury would effectively be “pushing the government line” in a room of policy makers appointed by the minister who “could be inclined to want to do the minister’s bidding.”

“That is an incredible weakening of the Reserve Bank’s independent and autonomous assessment” of government policy, Adams said.

Not quite sure about her biblical imagery (the story of Adam and the record of the apostles being quite widely separated in time), but even setting that to one side, is there anything to her concerns?

Having Treasury representatives on Monetary Policy Committees isn’t extremely common, but it isn’t unknown either. In Australia, the Secretary to the Treasury is a voting member, while in both the UK and Japan (both systems overhauled in recent decades) there is a non-voting Treasury observer. Perhaps Amy Adams can point to examples of how those systems have run into problems because of the Treasury participant? But I suspect not.

This is one of those issues on which reasonable people can reach different views, while recognising that the final choice probably doesn’t make that much difference. Personally, I’ve wavered on this one, but finally concluded that a non-voting Treasury observer could, on-balance, be a useful reform – although I took that view in the context of also favouring a much more open and independent MPC, less under the thumb of an ambitious Governor. But to suggest – on no evidence whatever – that it “is an incredible weakening of the Reserve Bank’s independent and autonomous assessment” of government policy” seems so overblown as to discredit any serious points Amy Adams wants to make about the legislation. Remember, for example, that the “room full of policymakers” will mostly have been appointed by the Governor himself and his Board. The Minister’s participation will typically be ceremonial and – to the extent it is more than that – hidden from view.

Having said that, one transitional arrangement announced last week does concern me. The Reserve Bank announced a few days ago that the Secretary to the Treasury himself (not a nominee) will from now on be invited to attend the monetary policy decision and deliberation meetings, in advance of the new legislation being passed and coming into effect. I found this a little worrying on three counts:

first, this is a significant time commitment for one of our most senior public servants. What won’t he be doing while he is sitting as a non-voting member of the Bank’s internal committees, at which the Governor finally takes an OCR view? If you think he already spends too much time, say, cosying up to Beijing or promoting vapid schemes around “wellbeing budgets” and Living Standards Frameworks, you might think this distraction was net gain for public policy. But I don’t suppose his employers quite see it that way. (As Makhlouf’s own term expires next year, it is not even as if he is going to be involved in the new committee on an ongoing basis),

second, the bill envisages a nominee of the Secretary to the Treasury serving on the MPC – perhaps a Deputy Secretary responsible for macro policy or the Chief Economist (both of whom have currently have central banking backgrounds). Makhouf, by contrast, has no evident expertise in macroeconomics or monetary policy, and

third, the bill does envisage a Treasury observer, but it also provides for several external voting members, who – so we are told, although I don’t take it very seriously – will play an important role in the new committee, including balancing out internal perspectives. Bringing in the Secretary to the Treasury himself now – months before the first externals appear (and the current “external advisers” do not attend Governing Committee meetings) – does risk creating a climate in which the Treasury perspective and presence (even though formally non-voting) is prioritised over the externals. That risk may be able to be managed, but it needs to be, including by the appointment of strong, capable, committed externals (and, as I’ve noted before, it is not clear why good people would seek the role).

Overall, this specific announcement was a mis-step. It was probably good for the Governor, but what is good for the Governor typically won’t be good for New Zealand (nothing personal – it is almost a precept of institutional design that the interests of the agent are often not that well aligned with those of the principal).

It is a shame that the National Party isn’t using the opportunity of the Reserve Bank Amendment Bill to push the case for a much more open, and democratically appointed and accountable, Reserve Bank.

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One thought on “Disagreeing with Amy Adams”

I have been thinking hard about what is so disagreeable about Amy Adams and I came up with nothing. Although she does have ownership of 3 farms. This puts her very much in the camp of Primary Industries as the only viable so called highly productive industry with 10 million cows that NZ has any capability and capacity for and for the government to happily subsidise the culling of cows and payouts to the Kiwi industries for disease eradication to the tune of billions of dollars. Who cares about high tech industries?